This development has energized critics of the German-led European austerity campaign. They argue that too much government belt-tightening too soon in economies already in recession is counterproductive — and is making deficit targets all but impossible to hit.

Wolfgang Münchau, a Financial Times columnist, writes today: “Spain’s effort at deficit reduction is not just bad economics, it is physically impossible, so something else will have to give. Either Spain will miss the target, or the Spanish government will have to fire so many nurses and teachers that the result will be a political insurrection.”

Paul Krugman, the Princeton economist and New York Times columnist, sounds a similar note: “The essential craziness of the orthodox German-inspired diagnosis of the crisis is on full display… What happened to Spain was a housing bubble — fueled, to an important degree, by lending from German banks that burst, taking the economy down with it. Now the country has 23.6% unemployment, 50.5% among the young.”

In his print column today, Krugman adds: “The Continent needs more expansionary monetary policies, in the form of a willingness — an announced willingness — on the part of the European Central Bank to accept somewhat higher inflation; it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it. Even with such policies, the peripheral nations would face years of hard times. But at least there would be some hope of recovery.”

And on Voxeu, Cinzia Alcidi and Daniel Gros argue that this isn’t, at root, a fiscal problem anyhow. Rather, Spanish house prices and wages are still too high: “All in all, it appears that Spain has not yet fully adjusted to the collapse of its enormous housing bubble, which propelled its economy on an unsustainable path until 2008. House prices have to fall further, the construction sector has to shrink further, and the reallocation of labor towards exportables is slowed down by a labor market that prevents wages from falling quickly enough.”

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